consignee is subject to the $25,000 floor provided in section 105 (f) (2).

(c) Not infrequently, however, the transaction between the manufacturer and the consignee is itself a sale, in which title to the goods is transferred to the consignee. In such case, in the sale to the ultimate customer, the consignee is himself the principal, and the proceeds of the sale are renegotiable receipts or accruals to him. Thus, in instances of this type, the amount received by the consignee from the customer, and the amount received by the manufacturer from the consignee, are both subject to the $1 million floor.

(d) Whether a consignment amounts in law to a sale will be determined, not by the parties' own characterization of the transaction, but by the substantive attributes of the transaction. Important considerations include, among others, the following: The nature and extent of the consignee's authority to sell the goods (i.e., whether in his own or the manufacturer's name, whether at prices and on terms set by himself or prescribed by the manufacturer, etc.); the consignee's assumption or lack of assumption of the risk of the customer's credit and the risk of loss of the goods prior to their sale to the customer; the method adopted by the manufacturer and the consignee for the payment to each.

1499.1-5 Renegotiation Ruling No. 5: Subcontracts within the scope of the act; sales and other transfers of patents (interprets act section 103(g) (1) and (2), 103(k); § 1452.6 of this chapter).—(a) Agreements between private persons for the sale or licensing of a patent are subject to the following rules:

(1) (i) Section 103 (g) (2) of the act defines the term "subcontract" as including "any contract or arrangement covering the right to use any patented or secret method, formula, or device for the performance of a contract or subcontract; ***." There is absent any reference to a transaction in which the owner by a present transfer divests himself of his title to the patented method, formula, or device. All that is dealt with is an arrangement under which the owner of the patent grants the contractor or subcontractor permission to use the method, for

mula, or device, retaining in himself the title thereto. In § 1452.6 (b) and (c) of this chapter the Board interprets section 103 (g) (2) of the act to include only licenses and other similar arrangements involving royalty payments.

*

(ii) Section 103 (g) (1) includes in the definition of a subcontract "any purchase order or agreement * ** to * ** furnish any materials, required for the performance of any other contract or subcontract, While the term "materials," as defined in section 103 (k) of the act, may be broad enough to include patents, the Board is of the opinion that, by dealing specially with patents in section 103 (g) (2), Congress thereby limited the renegotiable scope of transactions involving patents to licenses for the use thereof. Plainly, Congress did not intend that sales of patents, providing for the present unconditional transfer of title from the owner to the purchaser, should be subject to renegotiation.

(2) A present unconditional transfer by the holder of a patent of all his right, title and interest therein for its remaining life is one in which the transferee immediately acquires full rights of ownership, including the right to license others to use such patent, or to sell it and convey all his right, title and interests therein. The failure of a transfer to include either of these rights disqualifies the transaction as a present unconditional transfer. Accordingly, a transaction involving the retention of a security title to insure the vendor against loss upon a default in payment, or of a right of recapture upon default, would fall short of a present unconditional transfer of title to the patent, and would amount to no more than a "contract or arrangement covering the right to use" as described in section 103 (g) (2) of the act. The fact that the payment is to be made by the transferee on the installment basis, or on the basis of a percentage of sales or profits from the sale of articles or services covered by the patent, does not affect the question. See § 1452.6 of this chapter.

(3) A licensing arrangement which qualifies under the capital gain and loss provisions of section 1235 of the Internal Revenue Code of 1954 may nonetheless be subject to rene

gotiation. Section 1235 covers the treatment to be accorded for tax purposes to the transfer of "all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights." Section 1.1235-2(b) (2) of the regulations under the 1954 Code (26 CFR 1.1235-2 (b) (2)) includes within the meaning of rights which are not substantial, retention by the transferor of (i) legal title for the purpose of securing performance or payment by the transferee; and (ii) rights in the property which are not inconsistent with the passage of ownership, such as retention of a security interest (vendor's lien), or a reservation in the nature of a condition subsequent (provision for forfeiture on account of nonperformance).

(b) For renegotiation purposes, different rules prevail. The renegotiability of transactions involving patents is determined exclusively by the provisions of section 103 (g) (2) of the act. As indicated in paragraph (a) (2) of this section, retention of legal title or of a right of recapture causes the transaction to fall short of the present unconditional transfer of title, and such a transaction is subject to renegotiation. On the other hand, retention of a vendor's lien is not inconsistent with an absolute sale and will not of itself subject the transaction to renegotiation.

1499.1-6 Renegotiation Ruling No. 6: Raw materials cost allowance for unconsolidated affiliate (interprets act section 106(b); § 1453.2(c) (2) of this chapter).-(a) This section concerns the propriety of a cost allowance for pig iron purchased by members of a consolidated group from an affiliate not included as a member. The affiliate produces and sells pig iron to members of the consolidated group at a price less than the quoted market. The question is whether the group is entitled to a cost allowance as provided in section 106 (b) of the act, in lieu of the actual cost of the pig iron.

(b) The statutory cost allowance is available to a contractor only if he produces or acquires the product of a mine and processes, treats, or refines such product "to" the first form or state suitable for industrial use, as well as "beyond" such first form or state.

Pig iron is the first form or state of iron ore suitable for industrial use. If the affiliate were included in the consolidated proceeding, the group could claim that it had processed the iron ore to pig iron and beyond that state, thus complying with the requirements of section 106(b) of the act. But if the affiliate is not so included, there is no authority for attributing its activities to the members of the consolidated group. Accordingly, since the group does not produce or acquire the product of a mine and process such product to and beyond the first form or state suitable for industrial use, the group is not entitled to the statutory cost allowance.

1499.1-7 Renegotiation Ruling No. 7: Competitively bid construction contracts; scope of exemption; nonapplicability to negotiated contracts (interprets act section 106(a) (7) and (9); §§ 1453.6 and 1453.7 of this chapter).—(a) Section 106 (a) (9) of the act exempts:

(9) Any contract, awarded as a result of competitive bidding, for the construction of any building, structure, improvement, or facility, other than a contract for the construction of housing financed with a mortgage or mortgages insured under the provisions of title VIII of the National Housing Act, as now or hereafter amended.

(b) In accordance with the apparent legislative intent, the term "awarded as a result of competitive bidding" as used in the above exemption is interpreted in § 1453.7 (b) (1) (iii) of this chapter to mean "awarded in conformity with the requirements for procurement by formal advertising set forth in section 3 of the Armed Services Procurement Act of 1947." (See S. Rept. 582, 84th Cong., first sess. 3 (1955).)

(c) Procurement by negotiation is to be distinguished from the formal advertising procedure contemplated by section 3 of the Armed Services Procurement Act of 1947 (now 10 U.S.C. 2305). In negotiated procurement, price quotations or proposals are commonly solicited from a number of potential sources. The negotiations that follow the submission of proposals are conducted without reference to the requirements of section 3 of the Armed Services Procurement Act. The authority for procurement in this manner is derived rather from exceptions (1) through

U.S.C. 2304 (a), the Board will accept and adhere to that determination for purposes of renegotiation; likewise, if the contract states or otherwise indicates that it was awarded pursuant to formal advertising in accordance with 10 U.S.C. 2304 (a), the Board will accept and adhere to that determination for purposes of renegotiation.

(f) This exemption is limited to prime contracts for construction. Related subcontracts for construction are not within the exemption provided in section 106 (a) (9) of the act. However, such a subcontract is exempt under section 106(a) (7) of the act (see § 1453.6 of this chapter); except that, if the prime contract is exempt only in part under section 106 (a) (9) by reason of the provisions of § 1453.7 (c) or (d) of this chapter, the subcontract is exempt only if and to the extent that it relates to the exempt portion of the prime contract.

1499.1-8 Renegotiation Ruling No. 8: Competitively bid construction contracts; small business restricted advertising ("setasides") (interprets act section 106(a)(9); § 1453.7(b)(1) (iii) of this chapter.-(a) The exemption provided in section 106 (a) (9) of the act is confined to prime contracts, awarded as a result of competitive bidding, for the construction of any building, structure, improvement or facility (other than so-called Capehart housing). Under § 1453.7 (b) (1) (iii) of this chapter, a contract is considered to have been awarded as a result of competitive bidding if it was awarded in conformity with the formal advertising procedures prescribed in section 3 of the Armed Services Procurement Act of 1947 (now 10 U.S.C. section 2305). This limitation was prescribed by the Congress at the time of the enactment of the exemption (see S. Rept. 582, 84th Cong., 1st sess. 3 (1955)).

(b) Small business restricted advertising is a special method of procurement whereby contracts are advertised and awarded in the same manner as contracts made under 10 U.S.C. section 2305, except that bids and awards are restricted to small business concerns. To validate awards so made, contracts for total or partial small business set-asides, entered into after small business restricted advertising, are classified as negotiated procurements. See § 1-706.2 of the Armed Services Procurement.

Regulation (32 CFR 1-706.2), §1.706-8 of the NASA Procurement Regulation (41 CFR 18-1.706-8), and §§ 1-1.701-9 and 1-1.706-8 of the Federal Procurement Regulations (41 CFR 1-1.701-9, 1-1.706-8). However, for purposes of the exemption in section 106 (a) (9) of the act, since in such procurements all established principles and requisites of formal advertising are observed with respect to all eligible bidders, the Board considers that such contracts have been awarded in conformity with the requirements for procurement by formal advertising prescribed in 10 U.S.C. section 2305. This conclusion is consistent with the view expressed by the Comptroller General that "there may be formal advertising even though the bidding is restricted to a limited class or group," including specifically small business concerns (41 Comp. Gen. 230).

(c) It follows that construction contracts entered into as a result of small business restricted advertising, under the set-aside program, are within the exemption provided in section 106 (a) (9) of the act.

1499.1-9 Renegotiation Ruling No. 9: Federal Supply Schedule contracts; applicability to 30-day, $1,000 exemption (interprets act section 106(d)(2); §§ 1453.5(b) (8), 1455.3 (b)(5) of this chapter).-(a) This section concerns the the question whether individual orders, rather than Federal Supply Schedule contracts pursuant to which they are issued, should be scrutinized in determining the applicability of the "30-day, $1,000" exemption provided in § 1455.3 (b) (5) of this chapter. The question arises under the type of Federal Supply Schedule contract which obligates the holder to deliver materials and services under the supply schedule, and obligates certain agencies of the Government to purchase all or some of their requirements of the listed materials or services from the contractors for a stated period.

(b) This type of procurement instrument is recognized as a contract under the renegotiation statute, and thus the "30-day, $1,000" exemption is not applicable to it. It is for this reason that § 1453.5 (b) (8) of this chapter takes the form of an exemption of Federal Supply Schedule contracts to the extent that deliveries thereunder are made to agencies other than those named in the act, instead of

exempting individual orders issued under such

contracts.

(c) To be distinguished from the foregoing is the type of master instrument under which the contractor is not obligated to furnish any services or materials until he has agreed to specific job orders. In such a case, the master instrument is not a contract of which the renegotiation statute takes cognizance, but each job order issued pursuant thereto is considered a separate contract. Consequently, for purposes of the "30-day, $1,000" exemption, each such job order is considered separately.

1499.1-10 Renegotiation Ruling No. 10: Exemption, performance outside U.S.A.; effect of control over foreign corporation (interprets act section 106(d)(1); $ 1455.2 (c-1) of this chapter).—(a) (1) Example (1) :

X is a domestic corporation engaged in the manufacture of aircraft components which are sold in the United States under prime contracts with the Departments of the Air Force. X also sells components to Y, a non-resident corporation incorporated under the laws of a foreign country, doing business there and reselling X's products in Europe. Y is entirely owned by individuals who are not nationals of the United States. A portion of Y's sales are to the Department of the Air Force in Europe. Some of these sales are from stock maintained in Europe by Y and some sales are by direct order from Y to X with instructions to ship to military bases in Europe. Y is not engaged in trade or business in the United States.

(2) With respect to Example (1), the sales of X under its prime contracts are subject to renegotiation, whether or not delivery is made abroad. The prime contract, sales of Y are exempt from renegotiation under the "offshore" exemption provided in § 1455.2 (c-1) of this chapter. The sales of X to Y of items resold by Y to the Department of the Air Force are renegotiable subcontracts, since the exemption available to Y under § 1455.2 of this chapter does not extend to related subcontracts (see 8 1455.7 of this chapter).

(b) (1) Example (2):

X owns 60 percent of the voting stock of Y. Except for this difference in the stock ownership of Y, the facts are the same as in Example (1) (paragraph (a) of this section).

(2) In Example (2), the sales of X under both its prime contracts and its subcontracts are renegotiable. However, because X owns

1499.1-11 Renegotiation Ruling No. 11: New durable productive equipment exemption; determination of average useful life (interprets act section 106(a)(1); § 1454.23 of this chapter. (a) This section concerns the effect of the withdrawal of Bulletin F as a guide for determining depreciable lives for Federal income tax purposes, upon the partial mandatory exemption provided in section 106 (c) of the Renegotiation Act of 1951.

(b) Section 106(c) (1) of the act prescribes that, in applying the exemption provided in the section, the average useful life of equipment shall be "as set forth in Bulletin F of the Bureau of Internal Revenue (1942 edition) or, if an average useful life is not so set forth, then as estimated by the Board

(c) Revenue Procedure 61-21 (Treasury Department, Internal Revenue Service Publication No. 456 (7-62)), establishing depreciation guidelines and rules for Federal income tax purposes, includes in Part II, section 1, at page 22, the statement that "Bulletin F is withdrawn as a guide to examining officers for the determination of depreciable lives."

(d) The statutory adoption of the average useful life of equipment as set forth in Bulletin F, for purposes of partial mandatory exemption, is not affected by the action of the Treasury Department in withdrawing Bulletin F as a guide for determining depreciable lives for Federal income tax purposes. Accordingly, pursuant to this express statutory requirement, when the average useful life of equipment is set forth in Bulletin F, the Board will continue to use such life for the purposes of the partial mandatory exemption provided in section 106 (c). In all other cases, the Board will estimate the average useful life. of the equipment.

1499.1-12 Renegotiation Ruling No. 12: Exemption of contracts where period of performance does not exceed 30 days; nonsep